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mhy729 (41.43)

money as medium of exchange vs store of value

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August 23, 2011 – Comments (20)

I've been thinking about the use/purpose of money, and it seems that many agree that it is both a medium of exchange and a store of value.  Our modern economies seem to rely on the free flow of money for smooth and proper functioning, which fulfills the 'medium of exchange' part.  However, the store of value part presents a problem if a significant portion of money isn't circulated through the system (i.e. hoarding).  I do find myself agreeing with many parts of Austrian economics that argue against fractional-reserve banking and the leveraging of money, and also their contention that such and other monetary policies lead to boom/bust cycles.  The challenge I see is in having too much money saved in full-reserve demand deposits.  Even if this were "properly" implemented, which would necessitate safekeeping fees instead of our current "free" "demand deposits", a hoarding problem would exist if too high a fraction of the money supply is kept from circulation in this way.  This is why I am starting to think that maybe the 'medium of exchange' function of money is paramount, and the 'store of value' function secondary in importance.  Sure perhaps it is necessary to have it as a short-term store of value for convenience sake, but for long-term it would seem to be potentially extremely counterproductive.

I understand that in our current system, the deposit base of people like you and me (in our "demand deposits"...I use quotation marks because although the balances are available on demand, and even "insured" by the FDIC, the money deposited is actually not stored away but lent out), and the subsequent leveraging up of the money supply through fractional-reserve lending, provides a crucial liquidity for our economies.  I wonder what would happen if full-reserve banking were indeed implemented.  Demand deposits would become virtual safes, with any money inside not participating in the facilitation of economic exchange.  The only way lending/banking could occur is with time deposits and direct investment by cash holders.  I think everyone agrees that lending/banking is very important for economic development.  The question is how to keep a well-functioning banking system and allow for a healthy amount of lending even with full-reserve "safe deposit box" accounts.

It further makes sense that perhaps one of the main problems is the centralization of banking and legal tender laws.  Maybe with both of those done away with, and having truly free-market money (e.g. the gift cards issued by many ostensibly reputable vendors, although that example is flawed b/c the gift cards themselves are "indexed" to the $ or FRN) is the way to go, because if central planning doesn't work when it comes to guiding economies, why should it be given a special exemption when it comes to money/banking?  Perhaps a better example than the one I put there with the gift cards is having minutes of call-time on a communications network as a form of currency (I got that from BattleTech for any of you who know what that is).  And certainly you can have a private bank issue its own currency, backed by its own assets.  In any case let the free market decide what will work best.

Thanks for reading, and I apologize in advance if I betray gross ignorance with anything up there, as I certainly am no expert.  I would love to know your thoughts on the comparative values of the 'medium of exchange' and 'store of value' functions of money, or anything else relevant to money/banking.  And if you think I'm a free-marketeer nutjob that's okay too.  :)

20 Comments – Post Your Own

#1) On August 23, 2011 at 8:28 AM, dbtheonly (< 20) wrote:

Yes, I am very familiar with Battletech.

For many years the State & Local banks in the US issued their own bank notes. My Uncle, Mark, collects them for local banks. They're called "broken bank notes" because each and every bank that issued them went broke. The notes became worthless, except to a collector.

The short form is that the banks CAN'T work. "I wonder what would happen if full-reserve banking were indeed implemented.  Demand deposits would become virtual safes". Where's the profit fot the bank? What's in it for them? They store our money and what? We say thanks? We pay them a fee per month?

Now MHY Bank is formed and takes in $1000 of deposits. It issues $1000 of bank notes which begin circulating in Foolville. Then db comes by to withdraw his share of the $1000. Do you go out & recover that percentage of the banknotes? Using what?  Raising more capital? Then I return the next day & make a deposit. The balance simply can't be maintained. You can keep it close but every, EVERY, bank that tried it failed. Ask yourself why?

BTW, I'd suggest a visit to the American Bank Note Company museum in Philadelphia as a good trip if you're anywhere in the area. The history of money is a fun subject.

 I collect credit cards from broken, folded, no longer in existence issuers.  We call it "Numis-Plastics" it's a bad pun I know, but a fun & inexpensive hobby.

Your reliance on the "Austrian School" of economics also should be questioned. At least 30 years ago, their proponents were traveling down some dangerous paths, and showing an appalling lack of historical knowledge. The idea that "Jewish Bankers" started WWI has been used before. Ended badly for all.

So also the "gold currency", I've blathered on too long already, but look at the history of the US in 19th century. The very short version is that goods & services, "stuff" grew at a much greater rate than gold (and/or silver) could be mined. Panics occurred on about a 20 year cycle. 

 

 

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#2) On August 23, 2011 at 10:02 AM, PeteysTired (< 20) wrote:

The idea that "Jewish Bankers" started WWI has been used before

I don't remember reading that would you mind sending a link?

So also the "gold currency", I've blathered on too long already, but look at the history of the US in 19th century. The very short version is that goods & services, "stuff" grew at a much greater rate than gold (and/or silver) could be mined. Panics occurred on about a 20 year cycle. 

Please elaborate.

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#3) On August 23, 2011 at 2:28 PM, GNUBEE (24.85) wrote:

I believe today its just a medium of exchange, or way to make people interact.

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#4) On August 23, 2011 at 2:44 PM, TMFBlacknGold (99.39) wrote:

Maybe one day the world will be on a single currency. I suppose that's the way it would have to go eventually.

Where have ya been man? Haven't seen you in a while. Glad you're back!

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#5) On August 23, 2011 at 2:46 PM, whereaminow (58.64) wrote:

dbtheonly,

The idea that "Jewish Bankers" started WWI has been used before. Ended badly for all.

Either supply a link that directly supports what you have said or have the courage to admit you have no idea what you are talking about and retract the statement.

David in Qatar

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#6) On August 23, 2011 at 3:04 PM, TheDumbMoney (59.34) wrote:

oh god I just don't care, as to the topic of this post.  Anyone have any stock ideas?

btw,

David, in three seconds I found this anti-semitic claptrap online. 

http://www.historykb.com/Uwe/Forum.aspx/history/8638/How-the-Jews-started-WWI-part-2

Now whether it "ended badly," I can't say.  I suspect db is referring to the Holocaust, assuming this sort of theory was prevalent prior to WWII.   Whether it was prevalent, I can't say, though I have generally found that if any bad event happens anywhere at any time, one can usually find someone who is blaming jews for it, with bonus points if it is aconspi.

FYI to all: 

For a good first history book of actual events leading up to WWI and the war itself (as opposed to conspiracy theories), I suggest Barbara Tuchman's award-winning book, The Guns of August, available on Kindle.

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#7) On August 23, 2011 at 3:12 PM, dbtheonly (< 20) wrote:

The "Jewish Bankers" argument was run about 30 years ago. You were sailing close to is about a month ago, so I suspect you've seen it. Or have you forgotten what you posted last month? A Department of Truth would come in handy wouldn't it?It had an outgrowth in the claims of another Right Wing Austrian in the 1920's & it did indeed end badly.

Petey,

I did not pay close attention to the "Jewish Bankers" argument at the time, I rather dismissed it out of hand, but I'll try to find a link. or a citation of some sort. The short version is that there is a lot of garbage floating around the Libertarian Movement.

The US experienced Panics in 1837, 1857, 1873, & 1893. In each case there was simply not enough money to go around and I'd reference you to the arguments about "Free Silver" of the 1870s to 1890s.

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#8) On August 23, 2011 at 3:12 PM, whereaminow (58.64) wrote:

dumber,

Yes, but what does that have to do with the Austrian School of Economics?

See db's full quote above.

David in Qatar

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#9) On August 23, 2011 at 3:15 PM, whereaminow (58.64) wrote:

The US experienced Panics in 1837, 1857, 1873, & 1893. In each case there was simply not enough money to go around and I'd reference you to the arguments about "Free Silver" of the 1870s to 1890s.

There's a lot of garbage floating around alright.  While Keynesians were investigating this strange "lack of money" argument (as if there was an abundance of money at other times), they were sidetracked because they were too busy raping puppies.

You can't prove I'm wrong.

David in Qatar

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#10) On August 23, 2011 at 3:15 PM, dbtheonly (< 20) wrote:

DTAF,

Thank you. You beat me to it. Guns of August is good, but I found Lord Grey's (Sir Edward Grey) memoirs to explain everything quite clearly from a man at the center.

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#11) On August 23, 2011 at 3:23 PM, catoismymotor (72.81) wrote:

I thought an unstable Serb with a gun and a desire to do harm started WW1 by killing an Archduke.

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#12) On August 23, 2011 at 4:39 PM, TheDumbMoney (59.34) wrote:

db, never trust a memoir to give you an accurate picture of anything.

cato, I know you're joking, but as Tuchman tells it anyway, the seeds of WWI are in ancient disputes (battles as far back as 1500s) between France and Germany over territory, largely in Alsace Lorraine area, but not exclusively.  And more recently to France and Germany's 1-1 record of wars against each other in the 19th Century.  For example, the infamous reparations imposed on Germany after WWI were in part "pay back" from reparations Germany had imposed on France in 1870ish (that nobody remembers) when the Germans won that round and staged a parade down the Champs Elyesses.  A lot of it was about honor, etc.  Most of the rest of the nonsense surrounding the start of WWI was either excuse or the result of treaty obligations dragging others in.  So anyway a bunch of completely moronic generals who were veterans of those wars planned a new war in the series, and didn't realize that with the advent of tanks, planes, machine guns, poison gas, telegraphs, and broad treaties, this war, unlike previous wars, would involve much of the world and kill bajillions of people.  There you have it, WWI in a nutshell.

David, ok, I get it now, you read his/her post as linking Austrian economists to these "jews-started-WWI" conspiracies, I didn't see that, and assumed he was responding to something in the original post, which I only skimmed.  I will definitely say that in my three second Bing search I did not find anything linking the "Austrian" economic tradition to conspiracy nonsense about jews starting WWI.  :-) 

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#13) On August 23, 2011 at 4:42 PM, whereaminow (58.64) wrote:

dumberthanafool,

I figured.

You just have to be careful with dbtheonly.  He is possibly the most intellectually dishonest person I have seen on CAPS in a long time.  This isnt' the first time I've found him spewing blatanly untrue statements as if they were common knowledge.

David in Qatar

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#14) On August 23, 2011 at 7:26 PM, mhy729 (41.43) wrote:

dbtheonly

Yes, I am very familiar with Battletech.

Glad to hear that someone other than myself could appreciate the C-Bill reference.

The short form is that the banks CAN'T work. "I wonder what would happen if full-reserve banking were indeed implemented.  Demand deposits would become virtual safes". Where's the profit fot the bank? What's in it for them? They store our money and what? We say thanks? We pay them a fee per month?

Well yes, for demand deposits this would be what happens.  The only "play" money the banks would have to invest and/or lend would be those deposited in time accounts.  You believe that such a system would not work, and I never asserted otherwise; I was only exploring the idea of full-reserve banking and its implications for the lending/investing facility of banks.

This is part of the reason I wonder whether the 'store of value' part of money needs to be de-emphasized somehow to counter the dangers of hoarding, and having vital cash sitting around idly leaving less to circulate through the economy.  If money couldn't be kept indefinitely in this way, then nobody would be engaging in the unprofitable and economically damaging practice of hoarding.

I came across this at one point during my web surfing on this subject:

http://en.wikipedia.org/wiki/Freiwirtschaft and http://en.wikipedia.org/wiki/Freigeld

From the entry on "Freigeld" ('free money'):  "It is cash flow safe (a scheme will be put in place to ensure that the money is returned into the cash flow - for example, by requiring stamps to be purchased and attached to the money to keep it valid)" and also "The name results from the idea that there is no incentive to store the money as it will automatically lose its value after some time. It is claimed that as a result, interest rates would drop to almost zero."  This might qualify for the kind of modification to money I am thinking about.

Now MHY Bank is formed and takes in $1000 of deposits. It issues $1000 of bank notes which begin circulating in Foolville. Then db comes by to withdraw his share of the $1000. Do you go out & recover that percentage of the banknotes? Using what?  Raising more capital? Then I return the next day & make a deposit. The balance simply can't be maintained. You can keep it close but every, EVERY, bank that tried it failed. Ask yourself why?

Well it depends on what kind of deposits they are.  With time deposits you wouldn't have access to your money until the agreed-upon time period has passed, so a reserve wouldn't be necessary like with a demand deposit.  If those $1000 were placed in a demand deposit, the bank shouldn't issue notes for circulation.  Bank failures caused by bank runs done by depositors are due to the banks not having held full reserves to cover all demand deposits.  Demand deposit cash should be treated no different than expensive jewelry a customer might store in a safe-deposit box, except with the convenience to write checks and make electronic transfers, etc.  I am not saying any of this is ideal, only stating what would be necessary for a true full-reserve model.

I collect credit cards from broken, folded, no longer in existence issuers.  We call it "Numis-Plastics" it's a bad pun I know, but a fun & inexpensive hobby.

Cool...I am something of a numismatist myself.  Have a small collection of bullion coins from various nations, and ancient Roman Imperial coins.

Your reliance on the "Austrian School" of economics also should be questioned. At least 30 years ago, their proponents were traveling down some dangerous paths, and showing an appalling lack of historical knowledge. The idea that "Jewish Bankers" started WWI has been used before. Ended badly for all.

Well I haven't come across any of that, and I don't know why you are bringing up WWI.  Also, despite my own dislike for any form of demonizing ethnic groups, this is something of a red herring, as you are characterizing Austrian economics as "anti-semitic" and then using that to dismiss everything they are saying, without any critical analysis of their economic positions.  Nevertheless, I am curious as to what you are referring to, and will try to look it up.

So also the "gold currency", I've blathered on too long already, but look at the history of the US in 19th century. The very short version is that goods & services, "stuff" grew at a much greater rate than gold (and/or silver) could be mined. Panics occurred on about a 20 year cycle.

I assume you are referring to the dangers of deflation, which causes a hoarding incentive.  Yes I agree with this being a problem, which is why I am exploring the concept of money as an exchange medium vs. store of value.

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#15) On August 23, 2011 at 7:41 PM, mhy729 (41.43) wrote:

GNUBEE

Yes, I am beginning to feel that that is the more proper function of money (i.e. an alternative to direct barter).

BlacknGold

Thanks man!  Good to hear from you.  Yeah, I've been away from the Fool for a while, and may have been even longer had it not been for the recent market mayhem.  My RL portfolio has been hurting, and in retrospect I made some very poor calls (especially in regards to not locking in some profits).

A single currency would definitely have some benefits, but I couldn't say whether it would be the ideal.  I have been drawn to the ideas in the "Freigeld" concept linked to above, as it seems to address the issue with not having enough circulating money.  I really do think that maybe money should be primarily a replacement for direct barter (i.e. economic exchange).  As I am only exploring these ideas as an amateur hobby, I certainly do not hold a great deal of confidence that my analyses are "on the money" (hehe)

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#16) On August 23, 2011 at 7:49 PM, mhy729 (41.43) wrote:

dumberthanafool

oh god I just don't care, as to the topic of this post.  Anyone have any stock ideas?

Thanks anyway for the WWI history lesson.

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#17) On August 24, 2011 at 8:25 AM, mhy729 (41.43) wrote:

Here's something from Murray Rothbard at the Mises Institute on the subject of hoarding and whether it is a problem:

Money in a Free Society

The Problem of "Hoarding"

The critic of monetary freedom is not so easily silenced, however. There is, in particular, the ancient bugbear of "hoarding." The image is conjured up of the selfish old miser who, perhaps irrationally, perhaps from evil motives, hoards up gold unused in his cellar or treasure trove--thereby stopping the flow of circulation and trade, causing depressions and other problems. Is hoarding really a menace?

In the first place, what has simply happened is an increased demand for money on the part of the miser. As a result, prices of goods fall, and the purchasing power of the gold-ounce rises. There has been no loss to society, which simply carries on with a lower active supply of more "powerful" gold ounces.

Even in the worst possible view of the matter, then, nothing has gone wrong, and monetary freedom creates no difficulties. But there is more to the problem than that. For it is by no means irrational for people to desire more or less money in their cash balances.

[ rest at:  http://mises.org/money/2s9.asp ]

It is a well-reasoned argument for why hoarding may not be the danger to economies as it is made out to be.  I suppose in one very common real-world example of "deflation" the instinct to hoard ever more for ever lower prices is not observed:  consumer electronic goods, particularly computers.  I know I can always get a better computer for less money year after year if I wait, but eventually I do pull the trigger and buy, and many others will do so much faster than I.  Indeed you will even see some enthusiasts who will pay several times the MSRP for "scalped" X-Boxes and the like when they are first released and in limited supply, even though they know they can get one at MSRP if they just wait a bit.  I am reminded of the rather amusing example where Steve Jobs attempted to cash in on this phenomenon by pricing the iPhone at a high introductory price, then after the fanatics got what they wanted and initial frenzied sales abated, dropped the price by a not insignificant amount to entice the remaining shoppers, only to be forced to give out a rebate to the early buyers to avoid a PR backlash.  That was good for some laughs.

Back to money, whether or not my original concerns regarding hoarding are valid, I do firmly believe that fractional-reserve banking and its enabler--centralized banking--are deeply flawed and need to be done away with.  Centralized banking wasn't necessary to prevent banking crises, it was necessary for the bankers to continue to engage in their fraudulent practice of fractional-reserve lending with impunity and not have the natural economic order of things show them up for what they were doing with those very crises.  Banks are in danger of not having enough money for their depositors during bank runs only if they were lending out something that didn't belong to them.

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#18) On August 24, 2011 at 9:12 AM, TMFBlacknGold (99.39) wrote:

I've been hurting in Fool (rating down 30 pts) and in RL, but that was probably expected by my interest in NBY. I also own KERX (still green), UAN (way green), and ATHX (not so good but its LONG term).

I'll check out the links above. Have you ever read Das Kapital? Classic! Another one for your new hobby might be Superimperialism.

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#19) On August 24, 2011 at 11:02 AM, mhy729 (41.43) wrote:

Yeah, it has been rather painful, but I'm lucky to still be in the green overall, just not as much so as I was before.  Certainly my portfolio woes pale in comparison to the jobless, so I try to keep things in perspective.

I should definitely read Marx at some point...can't be an effective apologist for my free-market leanings without understanding the alternative viewpoints/theories.  Never heard of Superimperialism before, but after a quick Google search and look through author Michael Hudson's wiki entry, I am definitely intrigued.  Based on what I can glean at the moment, I must say I am partial to his views on "parasitic finance", and the inequity of "dollar hegemony" can't be disputed.

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#20) On August 24, 2011 at 4:58 PM, dbtheonly (< 20) wrote:

DATF,

At the risk of being horribly off topic, Sir Edward was the British Foreign Secretary in 1914, His memoirs detail the cabinet split over the events leading to the declaration of war. The only reason Britain entered the war is the German invasion of Belgium, in blatant defiance of international covenants. Britain honoured her treaty obligation to enter the war. Talk about vast comspiracies of Bankers to start the war simply are the ravings of conspiracy theorists.

Dave,

You have my opinion of you. Let that be sufficient. If you think Governments are so useless, move to Somalia

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